Issue

Plans Are Nothing; Planning Is Everything

08/01/2007

This well-worn axiom from a top military planner, General Dwight D. Eisenhower, describes the mindset necessary to survive and prevail in the melee of business. With the volatility in globally distributed supply networks, increasing international competition, and shortening product lifecycles, dealing with business when it doesn’t run as-scripted is critical. Globalization and the move to supply networks with multiple 3rd parties have changed the game and brought new challenges. One complication of dealing with demand volatility is reliance on outsourcing. The inability to respond quickly to demand volatility adds a ripple effect across partners in the supply network. The industry’s new power structure is more diffused with many stakeholders evolving in their roles.

As a capital equipment supplier, we work with OEMs and contract manufacturers who plan well, but still face situations not in their control. Invariably, these companies build the best forecast they can, and then work to improve its accuracy. Inevitably, as soon as they’ve settled on a forecast, demand changes or a major customer wants to cancel, change, or drop-in a new order. We feel the ripple effect of our customers’ demand changes, which are not in our own annual plan.

Visibility is at the core of the solution - without it, you don’t have the foundation and common understanding so important to problem resolution. Essential to this is metric management - whether to manage suppliers, supply chain performance, or operational performance. An AMR Research survey showed managing variable yet long cycle times as a top issue in an increasingly global environment. Next was building a global organization, with 40% saying their company built centers of excellence in their global supply chain. For the other 60%, the primary reporting relationship was through manufacturing. For those currently outsourcing to Asia, rising labor costs in China will inevitably relieve the competitive pressures that have been holding down prices throughout the region. It’s reasonable to predict that prices throughout Southeast Asia are going to start increasing; however, who knows when and how much. An alternative is Eastern Europe. Straight manufacturing costs in Eastern Europe run 8% to 12% higher than in China, but the lower risk factors may almost make it a wash. Notably, Romania is now home to several major EMS and OEM companies.

Equally important to searching for lower manufacturing costs is dealing with demand volatility. One casualty of demand volatility is inventory obsolescence. It may be counter-intuitive, but adding inventory actually reduces a company’s ability to respond to the marketplace, no matter which way the market moves. A phrase posted in Motorola factories says: “There’s no such thing as good inventory.” When an up-tick in demand occurs, even if every line-item is on hand, it’s likely to be limited by the availability of short-term capacity. When a down-tick occurs, inventory becomes a major liability because it uses up the company’s liquidity, consumes administrative and physical resources, is perishable, and decreases in value the longer it sits. When the market goes quiescent, like all complex systems, it begins to change. Current products get updated, new products are released, and old products get eliminated; none of which bodes well for inventory.

Companies must deal with the realities of imperfection in the planning process. It’s people, using human judgment at the scene, that make the difference, as they figure out the best course corrections when the unexpected happens. Responding to change tends to be decentralized. Most industry dialogue is focused on system-to-system collaboration. With supply chains more global and distributed, collaboration increases in importance. As demand volatility increases and product lifecycles shrink, the need to respond to change on-the-spot becomes imperative. Certain problems you can’t plan your way out of; well-informed people are essential to deal with them. People have to figure out how to make it work, weighing opportunity vs. risk and evaluating alternatives to quickly respond. The ability to respond to the unexpected is rapidly becoming the key to market leadership.

Companies need to continually improve their planning processes. Solutions that empower people to effectively manage changing situations are a key to competitive success. Rather than an indicator of poor planning, it appreciates the dynamics driving competitive positioning today and is a strategic asset that complements strong planning.

As R.D. Liang aptly put it: “We live in a moment of history where change is so speeded up that we begin to see the present only when it is already disappearing.”